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Unbiasedness of the Forward Exchange Rates
Author(s) -
Bakshi Gurdip S.,
Naka Atsuyuki
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00419.x
Subject(s) - forward rate , autocorrelation , econometrics , exchange rate , error correction model , mathematics , economics , multivariate statistics , statistics , cointegration , interest rate , monetary economics , macroeconomics
This paper derives an error correction model under the assumption that the spot and the forward rates are cointegrated, the first difference of forward rates is stationary, and the first order autocorrelation in the forecast error is allowed. When tests of the unbiasedness hypothesis are conducted with an error correction model using generalized methods of moments [GMM], the unbiasedness hypothesis cannot be rejected. Furthermore, the multivariate GMM estimation supports the hypothesis of unbiasedness of the forward exchange rates and the absence of a risk premium in the foreign exchange markets.